Givat Hamatos in southern Jerusalem — the name means “Aeroplane Hill” in Hebrew. It was coined when an Israeli plane was shot down here during the Six Day War in June 1967. Today it is where many fear Israeli-Palestinian peace hopes could crash and burn.

Givat Hamatos lies south of the Old City of Jerusalem overlooking the ancient road to Bethlehem. Nearby are the remains of a Byzantine church that marks the spot where, according to legend, Joseph and Mary rested on their way to Bethlehem. On Christmas Eve, the Latin Patriarch will be welcomed by local Christian dignitaries at the monastery of Mar Elias opposite. They will accompany him down the road to the tomb of Rachel on his annual procession to the Church of the Nativity.

To the north and west is the Palestinian neighbourhood of Bet Safafa and beyond these the skyline of modern Jerusalem. To the south-west lies Gilo, a large Israeli neighbourhood built across the pre-1967 border that Israelis see as part of the city and Palestinians regard as a settlement. To the east lies the similarly contentious new Israeli neighbourhood of Har Homa.

Palestinians say the entire area, which was in Jordanian hands between 1949 and 1967, is illegally occupied land. They regard Givat Hamatos as the last remaining artery from the future Palestinian capital in East Jerusalem to Bethlehem and the southern West Bank.

Israel says areas such as this that were annexed to Jerusalem after 1967 will always remain Israeli. The 2,600 residential units approved by the Jerusalem city council planning committee this week will ease overcrowding for all who live there, including Palestinians in Bet Safafa.

“This is part of East Jerusalem,” Adnan Husseini, the Palestinian governor of Jerusalem, told me. “This new settlement will create a chain closing the road, cutting off Jerusalem from Bethlehem and the south. They want to disfigure East Jerusalem and disfigure Bethlehem and the relationship between both.”

Mr Husseini believes buildings here must be cleared if there is to be peace, as must Gilo, Har Homa and all Israeli housing in East Jerusalem. Israel says that will never happen.

* Palestinian officials are discussing filing war crimes charges against Israel, staging mass protests in the West Bank and encouraging the international community to impose sanctions in a bid to seize upon their new recognition by the UN. Weeks before Israel’s general election, a Fatah movement official said: “2013 will see a new Palestinian political track. There will be new rules in our relationship with Israel and the world.”